The Credit Access and Inclusion Act: Should Credit Scores Include Utility Payments?

A bill is currently being considered by the House Financial Services committee in the U.S. House of Representatives that would make it easier for credit reporting agencies to include both positive and negative bill-paying behavior in credit scores.

The Fair Isaac Corporation, which changed its company branding in 2009 to be just FICO though the official corporate name remains the same, calculates FICO scores for every individual who has history with credit from a financial institution. These FICO scores are still the most-used metrics these same financial institution uses for gauging the creditworthiness or risk of anyone attempting to form a new credit relationship, as well as for reevaluating existing credit relationships.

The components of the FICO credit score haven’t changed much over the years except for occasional tweaks and adjustments, but the calculation factors in payment history, amounts owed, length of credit history, new credit, and types of credit. But for the most part, only financial institutions are included.

Companies outside of the financial industry also offer credit, or they have relationships with consumers whose behavior may be relevant to credit risk. The ability to pay rent on time or to keep utility accounts current could be indicative of behavior with financial credit accounts. A good history with rent payments should be a good indicator of how one might behave with a loan, so in theory, rent history could help establish credit — although obtaining an apartment might require a credit history in the first place.

Today, rent payments and utility payments can be reported to the credit bureaus, but only negative information only reaches the bureau. Although this information isn’t included in the FICO score calculation, it’s included in other scores the bureaus make available to corporate partners and customers, and almost always not to the public.

The bill that’s currently in the House of Representatives makes it clear that companies like telephone service providers and landlords can submit positive information to the reporting bureaus, and that information should be used to help consumers establish credit.

Although utilities and landlords can report negative information to the bureaus today, the process isn’t very tight. The reporting might be delayed, or companies might give consumers a chance to fix the situation, a bigger chance than financial companies offer. Some utilities won’t report a payment history to reporting bureaus until an account is in collections, which could be months after the customer stopped making payments.

With a formalized system in place for reporting information from landlords and utilities, this process would most likely become more like the process favored by the financial industry, wherein any infractions like late payments, credit inquiries, and closed accounts are reported in a timely manner and affect credit scores immediately. People who fall behind on utility payments for a month or two but catch up soon after have generally been immune to any credit reporting problems but will, if this bill becomes a law, probably have to deal with lowered credit scores.

Given that consumers facing financial difficulties are likely to default on their utilities, a streamlined approach to reporting and the opportunity to include this information in official FICO scores could damage credit scores overall.

This is a big drawback when weighed against the possible benefit of this new law. Will good payment behavior with rent and utilities allow someone without a credit history to establish financial credibility? Will a history of on-time payments for phone bills allow someone to quality for a lower-rate mortgage? It seems that good behavior won’t increase a credit score, just that bad behavior could damage it, if FICO begins including this history in its calculations. Someone without a credit history might not be able to sign a lease or a mobile phone contract anyway, so there’s only a small possibility of someone without a credit history using rent and utility bills to establish one.

There’s a theory that more data allows better analysis. Credit scores could be more accurate if more relevant factors are included. Bill and rent payments may be relevant to financial credit accounts, and with all of the data — not just some of it, as the bureaus are receiving now — the companies should be able to determine the extent to which late rent payments or late utility payments correspond to problems with financial accounts, and tweak their calculations to better reflect credit risk.

But is all of this worthwhile? Will this potential law only make it more difficult for people to establish a credit history? Will it give another reason for financial institutions to justify higher interest rates on loans?

This looks to be of the best benefit to those that don’t use credit (like those on the Dave Ramsey plan). Any situation that runs a credit check (rentals, insurance, some companies for employment, etc) and makes decisions based on your score, would have these additional reporting sources and might make decisions in your favor (like lower insurance premiums).

Not everyone knows that you have many different flavors of FICO credit scores. For example, some FICO scores are specific to the auto loan industry. If FICO came up with a “renter’s version” comprised of data from utility and rent payments, it could help a renter qualify for their next apartment, particularly if they don’t have traditional credit history.

I really think this is going over the top. So much is tied to our credit now that it’s becoming ridiculous.
It’s like we’re being set up. Nothing can be done in life without that magical score – the same score that can now be trashed by something as simple as a late utility bill.
Not good news.

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